Russia’s trade war with Georgia may cause more serious political headache for the Georgian authorities than economic problems to the country, experts say.

After banning the import of Georgian wine in March, the Russian consumer protection agency warned in April that sanctions might also be applied to Georgian mineral waters. This decision was backed by a resolution of the Russian Parliament’s lower house passed on April 19 which hailed the ban as a measure to protect the health of Russian consumers.

Economic Consequences

Due to a good harvest in 2005 the projected wine export to Russia was estimated by Georgian officials to increase significantly and reach about USD 100 million in 2006.

Georgia exported some USD 63 million worth of wine to Russia in 2005. About 87% of the total wine exported from Georgia went to the Russian market last year, according to the Georgian Department of Statistics.

The Georgian authorities have requested the International Monetary Fund (IMF) to estimate what will be economic consequences if the Russian market disappears for the Georgian wine.

Robert Christiansen, who is the IMF resident representative in Tbilisi, says that Georgia is “very well-managed” from the macroeconomic point of view and the “wine shock” should not cause macroeconomic instability.

“100 million [worth of wine projected to be sold in Russia in 2006] sounds like a lot of money, but for Georgia’s economy it is not… Georgia’s economy is sufficiently large. Georgia’s economy is about six billion U.S. dollars, so 100 million is not a huge impact,” Robert Christiansen told Civil Georgia on April 19.

“So at the macro level – not a lot of damage; at the micro level there could be damage,” he added.

He said that economic growth might slow down a little bit, but by less than one percent. “If Georgia can sell some of the wine somewhere else the impact on growth will be even less,” he added.

The IMF has forecasted Georgia’s economic growth at about 6-7% in 2006.

But Robert Christiansen also said that there will be an impact on some other areas, “as some of the wine producers could suffer greatly.”

Those thousands of people engaged in this sector, including wine factory employees and, especially, wine growers in the eastern Georgian region of Kakheti – famous for its vineyards – could suffer if the wine they produce cannot be sold elsewhere.

He said that although the IMF has emergency facilities to assist countries in cases of “trade shock” no such tools will be resorted to in this case, “as trade shock is not so large here.”

“The government’s reserves are very strong… so they do not need any additional financial support at this time,” Christiansen said.

He said that even if the ban is extended to mineral waters it wouldn’t have much of an additional macroeconomic impact. “Mineral water export is much less than wine. And unlike wine, mineral water exports are more diversified than wine exports,” he added USD 23.6 worth of Mineral waters was exported from Georgia to Russia in 2005, which is USD 10 million more than in 2004, according to the Georgian Department of Statistics.

80% of Georgia's most prominent mineral water Borjomi is exported abroad. 60% of exported Borjomi goes to Russia while the remaining 40% goes to 27 other countries around the world, according to the Georgian Glass & Mineral Waters Company, which produces Borjomi.

Some governmental officials, as well as analysts, argue that the current wine row with Russia has a positive side, as it is an opportunity for the Georgian producers to improve the quality of their wines and diversify their foreign markets.

“Change is difficult. Russia is a big market, it is an easy market, it is great for wine producers. Shifting [from this market] is very difficult, but countries and companies do that all the time,” Robert Christiansen said.

A group of Georgian winemakers and representatives of the Georgian Union of Wine Producers, who visited Moscow last week, said at a press conference on April 19 that re-entering the Russian market is still a top priority for them.

State Minister for Economic Reforms Kakha Bendukidze has called on the Georgian wine producers several times to focus on new markets outside of the Russian one, as this market has proved unreliable.

“Now let’s imagine there is a sea in the North and not Russia. Whom shall we sell our wine to? To the sea?” the Georgian media quoted Kakha Bendukidze as saying on April 18.

Political Consequences

If Russia remains closed for Georgian wines and local producers fail to enter new markets, the demand for grapes this year will significantly decrease, which will directly hit thousands of wine-growers, mainly in the Kakheti region, where some 60% of Georgia’s vineyards are located. The total area of vineyards in Georgia exceeds 37,000 hectares (91,400 acres).

The harvest, which usually starts in September, will also coincide with local self-governance elections in the country, scheduled for this autumn. President Saakashvili announced on April 17 that the polls will take place “in or around November.”

Some political analysts say that a decrease in demand and low prices for grape will increase the discontent of thousands of farmers towards the authorities, which may turn into a serious political challenge for President Saakashvili’s administration, which has already vowed to “save the Georgian wine sector.”